Mark Carney, Governor of the Bank of England and Chairman of the Financial Stability Board of the G20, introduced a new phrase into the lexicon of economic risk management when he addressed an Integrated Reporting themed seminar at the World Bank recently: the “tragedy of horizons”. This is the market failure brought about by the short-term thinking of businesses and investors through an inadequate response to future challenges – even when those challenges are known to be a great risk to economic stability.
The value of Integrated Reporting, Carney said, is that it helps investors think about “not just things that can be managed in the short term, but also costs companies are likely to be exposed to as policy responds to challenges”. These challenges exist across a spectrum of business activities – human capital, intellectual property and financial management – but Carney’s message was focused on the risks associated with climate change.
Carney’s argument is the most powerful yet for mainstreaming relevant forward-looking risks within corporate reporting through the adoption of Integrated Reporting so that, in his words, “all groups can express their view, and influence the allocation of capital and credit today”. And surely that is the point: to enable capital to flow more productively and help to unlock value creation over the short, medium and long term. This is the basis for financial stability and sustainable development.
Carney’s view was echoed by Bertrand Badré, CFO of the World Bank Group, which is now introducing Integrated Reporting. Both the World Bank and IMF are worried that a failure to manage risks could derail decades of investment in building institutional capacity and infrastructure in developing economies. Badré states that regulation can lack the necessary focus on creating value, and that “Integrated Reporting would enable governments and their stakeholders to gain a better understanding of resources available and help them to manage these more effectively.”
Of course, while it is powerful to magnify one set of risks to justify the “tragedy of horizons” analysis, the true benefit of Integrated Reporting will be released when governments, businesses and investors view risk, as the World Economic Forum has advocated, in an interconnected way. The impact on the real economy is acute, with an estimated annual infrastructure investment gap of $500 billion globally. It is why the B20’s support for a review of corporate reporting by the IIRC and IASB is so important – to align corporate reporting to the objectives of economic policy. This is the message we are now taking to G20 Governments ahead of the Brisbane summit in November 2014.
Carney’s “tragedy of horizons” analysis provides a contemporary rationale – and a regulatory push to the market – to adopt Integrated Reporting as the new best practice for managing and reporting risks. We are working with all market participants to create the conditions for greater financial stability and sustainable development that Integrated Reporting will help to bring about.